SEC Begins Small Business Costs and Benefits Study of Sarbanes-Oxley Act Section 404
Commission Proposes One-Year Extension of Final Compliance Requirements for Smaller Companies While Study Underway
The Securities and Exchange Commission today announced that its professional staff has commenced a cost-benefit study of an upcoming auditor attestation requirement for smaller companies under Section 404(b) of the Sarbanes-Oxley Act of 2002.
The study will collect and analyze extensive "real world" cost and benefit data from a broad array of companies currently complying with Section 404 under newly-issued guidance for companies and auditors. The new guidance for management and the new auditing standard were intended to reduce the compliance costs of Section 404 while strengthening its focus on material controls. In addition to assessing the Section 404 cost reductions resulting from the Commission's recent actions, the final report also will inform any decision to improve the efficiency and effectiveness of Section 404 implementation.In connection with the study, the four-member Commission unanimously proposed on Jan. 31, 2008, the one-year extension of the Section 404(b) auditor attestation requirement for smaller companies that SEC Chairman Christopher Cox had previously announced in testimony before the House Small Business Committee in December 2007. The postponement would allow time for completion of the study. Under the proposed extension, the Section 404(b) requirements would apply to smaller public companies beginning with fiscal years ending on or after Dec. 15, 2009.
"The Commission believes that strong investor protection and healthy capital formation go hand-in-hand," said Chairman Cox. "The study will give us the opportunity to ensure that the investor protections of Section 404 are implemented in the way that Congress intended, and do not impose unnecessary or disproportionate burdens on smaller companies."
The Commission's proposal to extend the Section 404(b) compliance date for smaller companies is the latest in a series of recent efforts to help reduce unnecessary costs of compliance for smaller companies, without diminishing important investor protections.
Section 404 has two provisions: 404(a) requires company management to assess the effectiveness of the company's internal controls over financial reporting, while 404(b) requires an auditor attestation on management's assessment. Larger companies, representing more than 95 percent of the market capitalization of U.S equity securities markets, have been subject to both provisions since 2004, but with significantly higher costs than were projected when the SEC's original rules implementing Sarbanes-Oxley were adopted.
To reduce Section 404 costs while preserving its benefits, the SEC last year issued new guidance for management's Section 404 assessment. The guidance helps companies focus their reviews on the internal control issues that matter most to investors. Companies of all sizes, including smaller companies, will file their first 404(a) reports using the Commission's guidance this year.
At the same time, the Commission and the Public Company Accounting Oversight Board voted unanimously to replace the standard for the 404(b) auditor attestation, which is intended to make the process more efficient. Larger companies are now filing their first 404(b) reports under the new audit standard.
The SEC's study will consist of two main parts: 1) a Web-based survey of companies that are subject to Section 404; and 2) in-depth interviews including companies that are just now becoming compliant. The dual approach will enable the Commission to gather data from a large cross-section of companies and analyze more detailed information about what drives costs and where companies and investors derive the benefits.
The SEC's Office of Economic Analysis will lead the cost-benefit study with assistance from the Office of the Chief Accountant and Division of Corporation Finance. Recognizing that much of the key financial data will not be available to companies until March or April at the earliest, Commission staff expects to complete the study by late summer or early fall.
Public comments on the proposed extension of the auditor attestation requirement for smaller companies should be received by the Commission within 30 days after its publication in the Federal Register. The full text of the detailed proposing release concerning this item will be posted to the SEC Web site as soon as possible.
The Commission staff has also published printed and online "plain English" guides to help small businesses comply with Section 404(a) requirements for the first time in their annual reports this year. The small business guide is available at: http://www.404.gov. (Press Rel. 2008-8)
Statement of the European Commission and the U.S. Securities and Exchange Commission on Mutual Recognition in Securities Markets
SEC Chairman Christopher Cox and the European Commissioner for the Internal Market and Services Charlie McCreevy met in Washington, D.C., on February 1. They had a wide-ranging discussion on topics of mutual interest, including the current market volatility, accounting standards, sovereign wealth funds, credit rating agencies, XBRL developments and mutual recognition of securities regulation. With regard to the recent market movements, they discussed national and international efforts to analyze the circumstances resulting in the loss of market liquidity and mitigate its recurrence.
On mutual recognition, they agreed that the goals of a mutual recognition arrangement would be to increase transatlantic market efficiency and liquidity while enhancing investor protection. An EU-US mutual recognition arrangement for securities would have the potential to facilitate access of EU and U.S. investors to a broader and deeper transatlantic market, increase the availability of information about foreign investment opportunities, promote greater diversification of securities portfolios, significantly reduce transatlantic trading and transaction costs, and increase oversight coordination among regulators.
As a first step, SEC and European Commission staff, assisted by the Committee of European Securities Regulators, would need to develop a framework for mutual recognition discussions. The mutual recognition process will also require consideration of a fair and orderly methodology for initiating discussions with the EU and interested Member States, taking into account limitations on resources available for carrying out the relevant assessments. Without prejudice to their respective domestic processes, Chairman Cox and Commissioner McCreevy jointly mandated their respective staffs to intensify work on a possible framework for EU-US mutual recognition for securities in 2008.
They jointly declared, "The U.S. and EU, which comprise 70% of the world's capital markets have a common interest in developing a cooperative approach to reducing regulatory friction and increasing investor access to investment diversification opportunities and enhancing investor protections. The concept of mutual recognition offers significant promise as a means of better protecting investors, fostering capital formation and maintaining fair, orderly, and efficient transatlantic securities markets. As we consider implementation of this concept, we encourage input from market participants."
Commissioner McCreevy and Chairman Cox agreed to work closely together during the year to review overall progress. In addition, SEC and European Commission officials and CESR staff plan to hold regular technical meetings over the year to begin to develop a mutual recognition framework. (Press Rel. 2008-9)
In the Matter of Aimsi Technologies, Inc., formerly known as Advanced Integrated Management Services
On Jan. 31, 2008, the Commission instituted public administrative proceedings against Aimsi Technologies, Inc. (Aimsi) to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding twelve months for failure to file required periodic reports.
In this Order, the Division of Enforcement (Division) alleges that Aimsi is delinquent in its required periodic filings with the Commission. In this proceeding, instituted pursuant to Securities Exchange Act of 1934 (Exchange Act) Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At the hearing, the judge will hear evidence from the Division and the respondent to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder, are true. The judge in the proceeding will then determine whether the registration pursuant to Exchange Act Section 12 of the securities of this respondent should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in these proceedings issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-57245; File No. 3-12945)
INVESTMENT COMPANY ACT RELEASES
MLIG Variable Insurance Trust and Roszel Advisors, LLC
A notice has been issued giving interested persons until February 25 to request a hearing on an application filed by MLIG Variable Insurance Trust and Roszel Advisors, LLC for an order under Section 12(d)(1)(J) of the Investment Company Act for an exemption from Sections 12(d)(1)(A) and (B) of the Act, and under Sections 6(c) and 17(b) of the Act for an exemption from Section 17(a) of the Act. The order would permit certain registered open-end management investment companies to acquire shares of other registered open-end management investment companies and unit investment trusts that are within and outside the same group of investment companies. (Rel. IC-28139 - January 31)
Approval of Proposed Rule Changes
The Commission approved a proposed rule change (SR-FINRA-2007-040) filed by the Financial Industry Regulatory Authority extending the effective date of paragraph (c) of NASD Rule 2821 until Aug. 4, 2008. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57228)
The Commission approved a proposed rule change (SR-NYSE-2007-98), as modified by Amendment No. 1 thereto, submitted by the New York Stock Exchange to reduce from six months to three months the period for which a company's average global market capitalization must exceed the levels established by the Exchange's pure valuation/revenue test. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57239)
The Commission approved a proposed rule change submitted by the American Stock Exchange (SR-Amex-2007-138) to establish a new class of off-floor market makers in ETFs called Designated Amex Remote Traders. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57241)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change (SR-CBOE-2007-152) as modified by Amendments No. 1, 2, and 3 thereto, filed by the Chicago Board Options Exchange relating to a Hybrid Agency Liaison (HAL) step-up rebate and pass-through of certain linkage related costs has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57231)
A proposed rule change filed by the International Securities Exchange and Amendment No. 1 thereto, relating to equity fees (SR-ISE-2007-124) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57237)
Proposed Rule Change
The New York Stock Exchange filed a proposed rule change (SR-NYSE-2008-03) to rescind Rule 97 (Limitation on Member's Trading Because of Block Positioning). Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57236)
JOINT INDUSTRY PLAN RELEASES
Approval of Joint Amendment No. 25
The Commission approved a joint amendment to the Plan for the Purpose of Creating and Operating an Intermarket Options Linkage submitted under Rule 608 of the Securities Exchange Act of 1934 by the American Stock Exchange, Boston Stock Exchange, Chicago Board Options Exchange, International Securities Exchange, NYSE Arca, and Philadelphia Stock Exchange relating to response time for certain orders sent through the Linkage. Publication is expected in the Federal Register during the week of February 4. (Rel. 34-57238)
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